Julian Joseph (pictured), real estate partner and retail specialist at law firm, Shakespeare Martineau
The UK’s retail sector has faced a host of challenges in 2020 and, moving forward, it is essential that retailers innovate in order to thrive in the ‘new normal’. As the sector struggles with reduced profits, landlords are being forced to re-assess their own circumstances and consider negotiations around rent terms and reductions, turnover-based rents, upwards/downwards rent reviews and working with tenants to help boost revenue. Positive landlord-tenant relationships are beneficial to all, so what role can landlords play in helping create the high street of the future?
The end of the high street?
Ultimately, COVID-19 has had a significant impact on the retail sector. On the high street, superstores and independent retailers alike have suffered from reduced footfall, growing lockdown restrictions, and pressure caused by a rise in e-commerce. However, the high street has been ailing for some time and the pandemic has merely brought these issues to the fore.
In recent weeks, however, the national lockdowns have spurred on a change in customer behaviour, with people turning to their local shops and supporting small, independent businesses. From providing neighbourhoods with essentials to offering a safer, socially-distanced environment to get out and about, the high street has re-established itself as the heart of the British community. It has already began to adapt and will continue to do so.
Non-essential retailers, both large and small have been forced to evaluate their balance sheets and cut back on costs. With rent one of the biggest operating expenses for retailers, along with employee wages and other operating costs, some have faced the tough decision as to whether they sell up and leave their high street locations.
For landlords, this has been a wake-up call: should they show flexibility to struggling businesses? Or face the process of having to find a new tenant, at a time when bricks and mortar retail is not particularly attractive, and accept the dreaded business rates that must be paid after a retail property has been empty for three months?
As landlords and retailers have a symbiotic relationship, both parties need to come to terms with the struggles of the sector. Showing some much-needed flexibility today may spare future headaches tomorrow.
Should the retailer be struggling, either a rent holiday or, preferably, cancelling the rent altogether for a limited period can help alleviate some pressure, but all parties need to be aware that this is only a temporary fix. If both tenants and landlords intend to take this approach, it should be clearly laid out what the terms are, as well as the nature of re-payments. Alternatively, varying the lease to make it more tenant friendly, could be considered; however, both parties must ensure they have this agreement in writing and that it is properly documented.
For long-term options, landlords can look at restructuring leases and contracts to reflect current market values, such as committing to reviewing rent on an annual basis. For example, reworking a lease into a turnover-based rent agreement could give retailers some much-needed flexibility, as the rent is determined by current market conditions and the financial performance of the tenant. Typically, there is a base rent of around 75-80 percent of the current payment with 20-25 percent derived from turnover. These percentages may need to be weighted in favour of the tenant, in addition to reviewing the annual market rents on an upwards/downwards basis.
These shows of flexibility will be greatly appreciated by any business in the current climate, whether they’re struggling or not, and can go a long way. Alternatively, wealthier landlords with a large portfolio might also consider becoming an equity partner in the tenant’s business, allowing them to share in the good and bad times and providing a financial safety net where necessary, if it means that their retail units remain in occupation.
Communication is key
In a volatile market, co-operation is key. Holding onto loyal tenants is crucial for landlords and establishing a clear line of communication will help both parties, should there need to be a renegotiation. To ensure everyone is on the same page, honesty and transparency are essential.
Seeking professional advice will help all parties to understand their options and allow any disagreements to be settled at the earliest possible opportunity.
Rethinking the high street
There have been plenty of calls to restructure the high street, with John Lewis advocating a commercial to residential strategy. With a recent plan to build rental homes above or beside Waitrose supermarkets around the UK, the major retailer benefits from something that high streets do not: owning the entirety of its space.
To innovate, high street landlords can consider adapting units into workspaces and offices. From 1 September 2020, the government made it easier to alter the use of a commercial building without the need for planning permission. Now, use classes A1 (shops), A2 (financial and professional), A3 (restaurants and cafes), B1 (offices) and parts of D1 (non-residential institutions) and D2 (assembly and leisure) all exist under one new use class, ‘Use Class E’. This, however, is currently subject to a legal challenge in the courts. Alternatively, with bigger chains, like Aldi and Lidl, keen to move into local high streets, landlords with empty units could consider striking up new relationships.
With many retailers facing the struggles due to reduced footfall and the rise of e-commerce, landlords are faced with the balancing act of remaining agile while protecting their own interests. With a foundation of clear and ongoing communication, bearing in mind that both parties may be struggling, and showing the appropriate flexibility, both tenants and landlords can help the high street thrive again.